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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Lenta International (LON:LNTA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Lenta International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = ₽25b ÷ (₽343b - ₽107b) (Based on the trailing twelve months to March 2022).
Therefore, Lenta International has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Consumer Retailing industry.
View our latest analysis for Lenta International
Historical performance is a great place to start when researching a stock so above you can see the gauge for Lenta International's ROCE against it's prior returns. If you'd like to look at how Lenta International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Lenta International's ROCE Trending?
When we looked at the ROCE trend at Lenta International, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Lenta International's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Lenta International. Despite these promising trends, the stock has collapsed 74% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.